How to work with incentives to stimulate change

Summary and key action points

Incentives are one of the main links between people and change. Successful capacity development initiatives are dependent on having the right incentives in place because positive change can only be sustained where improved performance is enabled and rewarded.Incentives are most usually considered at the individual level, defined as either financial or non-financial, and internal or external, but it is also relevant to consider the organisational level and informal incentives.

Tips for developing an incentive structure

Creating an appropriate and optimal mix of incentives of different types:

Financial incentives can be important, but don’t always work and are most effective if combined with non-financial incentives

In particular merit based schemes for recruitment, promotion and professional development opportunities are effective incentives. Merit incentives do not have to be formal – simple recognition of effort and results can be highly motivating. Pride, prestige and public recognition are also powerful incentives.

Accountability is another non-financial incentive. The external environment can be both the source of ‘demand-side’ calls for good performance and accountability. There are many opportunities to introduce accountability incentives linked to service standards and customer satisfaction, for beneficiaries groups, management, local or national politicians, and or donors

Another type of non-financial incentive is benchmarking and competition, to stimulate healthy competition between different work units.

Training needs to be used with caution as it can become a perverse incentive

It is important to be careful of unintended negative consequences.

Linking incentives and good human resource management: a key factor in improving public sector performance is to have in place incentive structures that attract, retain and motivate staff and hold them accountable for their performance. Internal incentives therefore need to be used in conjunction with staff management and performance processes that are embedded in the organisationalculture and how performance is rewarded and punished.

Targeting: who is most likely to contribute towards sustainable capacity if appropriately motivated and rewarded?

Sequencing: some incentives can be dealt with quickly at an operational level, but some need policy level change that will take time to resolve, so it is important to sequence the introduction of incentives accordingly.

Attention to culture and context: the enabling environment is highly pertinent because it can be the most powerful source of both formal and informal incentives that either provide or block capacity development and the source of incentive resources. Where officially sanctioned and supported formal incentives are missing, the situation often creates informal incentives that work against capacity development

Creativity: small expenditure on activities like team building or workplace upgrading that are not usually thought of as capacity development can create the conditions for capacity development to happen.

Some incentives that have been used to good effect are listed below.

Introduction

Incentives are one of the main links between people and change and this applies to change for capacity development as much as to change for any other reason. Many studies have shown that one of the key factors in successful capacity development initiatives is having the right incentives in place because positive change can only be sustained where improved performance is enabled and rewarded. Given that development is as much a political as a technical process what can be achieved is frequently dictated by power and incentive structures. Development sector approaches in many developing countries therefore attempt to change any existing incentive structures that work against sustainable capacity development and replace them with more positive ones.

Relevance of the enabling environment

The enabling environment can be the most powerful source of both formal and informal incentives.

The enabling environment will not only create the mandate and rules for the functioning of the public (or any other) sector, it will also dictate power dynamics and the control of significant factors such as the flow of resources. So aspects of the enabling environment will be highly pertinent for either providing or blocking capacity development at both organisational and institutional levels. This needs to be taken into account when assessing what incentives are at work that will encourage and facilitate public agencies to fulfil their mandate effectively.

Types of incentives

It is not possible to be definitive about exactly what constitutes an incentive because what motivates one person will be of no interest to another. Another challenge of definition is that some frequently used incentives can be defined in different ways, for example some people classify training as non-financial, but others think it is financial because of the costs involved.

In general incentives of all types are most usually considered at the individual level, defined by two pairs of dimensions that are often linked together in a matrix:

Financial

Non-financial

Internal

e.g. a fair salary

e.g. career progression opportunities

External

e.g. project based salary supplements

e.g. awards and public recognition

There is now recognition that organisational level incentives are highly influential, and that it is necessary to understand informal incentives that work against capacity development.

However, it is now recognised that in order to have a comprehensive understanding of how incentives work, it is necessary also to consider two further dimensions. First, because while individual level incentives are important other, higher level, factors can also be very influential, so going beyond individuals to the organisational level can provide a very influential set of factors supporting capacity change. Organisational level incentives are often integral to organisational culture and how performance is rewarded and punished. While they may appear to be indirect for individuals they will be central to the overall structure necessary for other incentives to be effective.

Second, in situations where there are few or no officially sanctioned and supported formal incentives, the power of informal incentives is significant: they are often illicit and an indication of poor governance. An informal incentive might be something like wanting to gain and maintain the patronage of a powerful official, or peer pressure to be involved in corrupt practices. Informal incentives are often a key indicator of what is in place at the institutional level.

Note: sometimes official and positive non-financial incentives are referred to as informal. In the analysis on this page the word informal is being used to denote those incentives that work against sustainable capacity development because they are not officially sanctioned, not transparent or have some other negative aspect to them.

Unintended consequences

Incentives can have both positive and negative impacts – sometimes both at the same time. For example, incentive schemes that reward and motivate some staff are often found to demotivate those staff who do not get the rewards, whatever the reason. There is also the syndrome of ‘perverse’ incentives, which are the incentives that motivate people for the wrong reasons. The example of perverse incentives most usually given is that of people attending conferences, meetings or training courses not because of interest in the subject but because of the per diem for attendance that supplements low salaries. Unfortunately aid interventions designed to be helpful for civil servants, such as per diem schemes, allowances and top-up systems, are now seen to have contributed much to this problem. Perverse incentives need to be considered carefully when designing an incentive structure in order to be aware of any potential negative consequences of what might be put in place.

Financial incentives

Financial incentives don’t always work and the potential impact of non-financial incentives appears to have been underestimated.

Most generally financial incentives are an organisation’s formal system of salaries, bonuses and other financial benefits such as housing allowance or health care compensation. While financial incentives are important they are not the whole story and various studies have shown that the positive impact of non-financial incentives has so far been underestimated. In some cases financial incentives make no difference at all to how people utilise their capacity to improve performance. In other cases impact is only achieved when a combination of financial and non-financial incentives are put together, which is an important point in developing countries where it is not realistic to design incentive structures based on the availability of money.

Non-financial incentives

Non-financial incentives can be further categorised into two broad types: merit-based and those linked to accountability.

At the individual level merit based schemes for recruitment, promotion and professional development opportunities are known to be much more effective incentives than other approaches, especially schemes based on seniority. Similarly, using merit as the basis for deciding attendance at conferences, workshops and training, or resource allocation, will usually have positive impact. Merit incentives do not need always to be formal – simple recognition of effort and results can be highly motivating. Pride, prestige and public recognition can all be very powerful positive incentives. At the organisational level merit based performance assessment as the criteria for allocation of resources is an incentive. Using merit as an incentive needs to be embedded in clear and equitable policies and procedures that are used transparently at all levels. For any rewards allocated on the basis of merit at either level, the criteria for decision making needs to be seen to be just, equitable and transparent.

Accountability is another important incentive for improved performance. Public sector institutions do not have the same type of powerful accountability that the private sector has in terms of customer satisfaction being essential to corporate survival. However there are still many mechanisms can be put in place for accountability to beneficiaries groups, management, local or national politicians, and or donors. (See also internal and external incentives below.) Establishing comprehensive and effective accountability systems takes time and they will only come into place and be sustainable if linked to other incentives, rather than being solely a system of control and sanctions.

Other types of non-financial incentives:

Benchmarking and competition, which are very common in the private sector. Even simple benchmarking can prompt an element of competition as an incentive to improve performance.

Good human resource management, to improve people’s working conditions. Clarifying job descriptions in relation to organisational mandate; ensuring that performance management and staff appraisal systems are in place and properly implemented; or simplifying previously confusing or difficult systems can all be important incentives that encourage staff to work better.

Training can be very influential in supporting capacity development, but it can have questionable results. It is often used as an incentive, but all too often it is caught up in the perverse incentives trap. Additionally there is rarely sufficient follow up for the learning from the training to be applied and result in sustainable capacity.

Internal and external incentives

A key factor in improving public sector performance is to have in place incentive structures that attract, retain and motivate staff to work well. Internal incentives therefore need to be used in conjunction with processes that manage and evaluate performance. The only sustainable way for such structures to work is if they are transparently negotiated with and sanctioned by government as part of public sector conditions of service, rather than being ad hoc and temporary as the result of donor projects.

While individual and organisational capacities are internal, how they are developed is frequently determined by external factors. The external environment can be both the source of ‘demand-side’ calls for good performance and accountability, and the source of incentive resources. Demand-side mechanisms for accountability can include citizen surveys, complaints procedures, public reports, and so on. Again while it is never the whole story, external demand for results and accountability can be particularly influential and the motivation for internal changes that lead to capacity development. As noted above the public sector has few incentives linked to performance in the way that the private sector does, for example a sales person getting a bonus for achieving a sales target. However, even in the public sector, there are still many opportunities to introduce incentive systems linked to service standards and customer satisfaction.

Tips for developing an incentive structure

As noted above, there are several helpful points to remember when developing an incentive scheme.

Creating an appropriate and optimal mix of incentives of different types. Relying on just one type of incentive is rarely likely to be effective. The Social Security Fund of Rwanda (see case study below) has become a success story because of internal as well as external incentives at work.

Linking incentives and good human resource management

Targeting

Sequencing

Attention to culture and context

Creativity

Some incentives that have been used to good effect

Internal

External

Non-financial

Individual level

Clarity of tasks and purpose set out in a clear job description and linked to a match with individual capabilities

Internal accountability, linked to performance management tools

Supportive supervision and feedback

Recognition and awards schemes

Merit based status, career prospects and professional development, including training allocated in transparent and equitable processes

Opportunity and support to apply new skills and learning from training

Study leave, sabbatical or other planned career breaks

A sense of achievement, purpose and meaning

Quality of personal relationships in the workplace

Autonomy in personal matters

Participation in decision making processes and reforms

Work environment

Prestige and reputation

Job security

Holidays

Flexible working hours

Individual level

General living conditions

Awards and public recognition

Organisational level

A mission that employees can identify with and understand their contribution towards achieving

Performance oriented management: style, clear and consistently applied performance standards, the means to support with resources etc., and the ability to recognise and reward good performance

Good leadership

Team building and morale boosting

Quality improvement teams and building a quality culture

Vertical and horizontal dialogue among staff for participatory problem assessment and problem-solving processes

Technical upgrading

Recreational facilities

Organisational level

Public accountability schemes such as citizens’ charters, service delivery surveys, etc.

Case studies

There are several case studies of capacity development success stories that show clearly how incentives have been used with great effect to support positive performance change. One such is the Phnom Penh Water Supply Authority, written up in the MfDR sourcebook, shows how incentives were used strategically in the process of creating an effective municipal utility.

Another interesting case study from the Public Sector Capacity Building Secretariat in Rwanda (www.pscbs.gov.rw) illustrates how incentives were used to develop, utilize and retain capacity in a public sector institution.

Case study: Rwanda Public Sector Capacity Building Secretariat

BEST PRACTICES IN CAPACITY DEVELOPMENT SERIES

A Success Story in Capacity Development in the Rwandan Public Sector:The Social Security Fund of Rwanda

Background and Organizational Structure

The Social Security Fund of Rwanda (CSR) was created during the colonial rule and catered for contractual workers in Ruanda-Urundi and the Congo-Belge. After Rwanda’s independence, the decrees were amended by the Government of Rwanda to formulate the Decree Law of 15th November 1962 marking the official existence of Social Security Fund of Rwanda. The laws currently facilitating and enforcing the good functioning of the institution include the 1974 social security law and the 2003 amendment.

The Fund, under the tutelage of MINECOFIN is mandated to provide social security services to employees in Rwanda. It employs a total of 231 people, from which 143 work in the head office in Kigali and others work in local offices in all 30 Rwandan districts. For the purposes of efficiency in managing the Fund, the Board is subdivided into various management committees each with distinct duties and the organization is structured in 10 departments.

The achievements of the CSR…

Since it was reformed in 2005, CSR has registered a lot of successes. By the year 2002, CSR had 4,099 employers compared to 11,832 in 2009. The number of declared employees shifted from 179,720 in 2002 to 306,561 in 2009. On average, employers and employees increased at an average rate of 16.8% and 8.5% respectively. Between 2005 and 2010 its major achievements include:

Decentralized services with branch offices in all 30 districts, where all services are available.

Increased number of timely and true declarations through audits and awareness raising initiatives geared at employers.

Improved service delivery through new online services like registration, inquiries, and checking of account situation.

Backlog of over 7 million un-computerized declarations from 1963 to 1993 entered into the database to speed up processing of benefits. Processing a dossier takes maximum 5 days now.

How did the Social Security Fund of Rwanda reach such a success? A story of capacity development…

Human resource development and management for motivated and skilled staff

“The success is largely attributed to our staff of fresh graduates who are keen on learning new things” Henry Gaperi, the former Director General said. “What the institution aims at is to have good and well trained professionals, to ensure that they serve to the best of what is expected from them and to ensure clients receive quality services in a specified time” Henry further emphasized.

The institution engages in both internal and external training programs for its staff. Departments are asked to present training requirements based on their priorities to enable successful and effective training. Furthermore CSR created an opportunity for its staff to widen their knowledge through opening an in-house library equipped with updated text books in the fields of Law, Finance, Construction, Real Estate, Investment Analysis, Planning and professional courses in Accounting.

The process of inducting new staff members entails organizing meetings with different heads of units to acquaint new members with a whole range of activities undertaken by the institution and conducting training on specific areas in which the staff will be operating. The institution then ensures that individual capacities are utilized on the job through proper allocation of tasks with regular monitoring and evaluation as well as coaching.

CSR’s human resource policy is geared towards skills development, promoting innovation and creativity among staff, ensuring efficiency and competency and motivation of all staff. On top of that, the institution ensures that all staff are knowledgeable of systems and procedures by involving the staff in the process of designing these procedures and monitoring their application.

However, challenges of staff retention exist in this institution as well. Like in most other public institutions, it’s not easy to keep staff on board. For this reason the CSR tries to make the job more attractive by applying a job rotation system. The objective is to expose the employees to different experiences so that they develop a wider variety of skills and gain additional insights into the institution.

The institution has put in place a staff recognition scheme as one of the rewarding systems. Staff members with excellent performance and those who produce relevant and useful innovations are rewarded by the institution’s management team. All this intends to motivate staff and to promote research and development in the Social Security Fund of Rwanda.

Leadership for change and organizational development…

“It’s not only about training and getting the right people on the right positions within the institution, it’s also about management” explained Gaperi. Therefore Social Security Fund developed various management tools, legal instruments and plans which include for example policy issues, processes and internal procedures.

One of the ways in which the institution’s top management provides leadership for change is through their decision making system. The top management has initiated a bottom-up system which involves all staff in the transformation process. The institution strengthened the commitment for change by ensuring that all staff members understand the need for change and are capable of shouldering it.

CSR manages the change process by involving all stakeholders and ensuring that they are part of the processes. CSR also uses a specific information network technology which facilitates information sharing between the headquarters and the branches all over the country. The former Director General asserted that “unlike before, currently there is no need for people queuing at the headquarters since similar services can be accessed in the districts”.

Lessons learnt

The Social Security Fund of Rwanda has become a success story because of internal as well as external factors. A strong outside demand coming from Government requests a well-functioning social security system and enables the well functioning of CSR by assuring adequate legislation and providing CSR with a clear mandate.

Parallel to this, internal changes took place to improve the institution’s functioning; the organization developed an efficient organizational structure and implemented a clear HR policy focusing on capacity creation (mainly through training and providing access to information), capacity utilization (by setting clear objectives and expectations towards their staff) and retention (various measures to keep staff motivated, not only through financial incentives but through possibilities for personal development, active participation, creating space for innovation and creativity and rewarding schemes recognizing good practice)

In the CSR, the organizational culture makes changes possible. This way, the organization keeps improving and stays dynamic, ready to tackle new challenges.